July 24, 2011

Where have all the startups gone?

It may be financialization--the big money to be made in the 2000s was in financial markets and feeding the financing of the housing bubble. It could be my bias, but shifting money around through the invention of exotic financial engineering doesn't seem particularly dynamic in any lasting sense.

Also, excessive wealth concentration may lower the potential returns to new entrepreneurial initiatives as the winner's circle is diminishingly small. If so, an economy like ours with such high levels of inequality could dampen dynamism. Of course, this could go the other way--if the reward to making it to the top 0.1% of the wealth scale is huge, the incentive to try is that much greater.

Finally, while demand isn't an obvious explanation, it may be the right one. Though inequality increased in both the 1990s and the 2000s, the middle class and poor did MUCH better in the 1990s. And so, demand was much more broad-based. This meant a lot more sales not just at Nordstrom’s and Walmart (the top and bottom) but everywhere else as well, and that's a much better climate for startups.

I'm going to add one more possibility: the dubious use of patents to stifle competition. The patent trolls, such as Nathan Myhrvold, have figured out how to use patents to shake down software developers and software companies so they are unable or unwilling to develop new applications. In fact, UK developers are withdrawing their apps for the iPhone and Android from the US market because they don't want to swim in the shark infested waters known as the US economy.

Today, available Silicon Valley jobs are ones where legal gangsters (the banksters and patent trolls) are out stiffing the marks for nothing of value. Because you know, greed is good!